Class 12th Macroeconomics - Chapter 1: Circular Flow of Income

Introduction

• Circular Flow of Income: It is a cycle where production, distribution, and expenditure of money occur.
• This cycle continues indefinitely and money does not deplete.

Phases of Circular Flow

1. Production Phase: Money is produced here.
2. Income Phase: Money from production is converted into our income.
3. Expenditure Phase: Money is consumed or spent.

Example

• Factory Worker:
  • Production Phase: Earning money while working.
  • Income Phase: Receiving money as income.
  • Expenditure Phase: Spending money like buying household items.

Factors of Production

• Land: Earns rent.
• Labour: Earns wages.
• Capital: Earns interest.
• Entrepreneur: Earns profit.

Two Sector Economy

• Definition: A model with only two components - households and firms.
• Process:
  • Providing factor services to the firm and receiving factor payment in return.
  • Using factor payment to purchase goods and make payments to the firm.

Leakage and Injection

• Leakage: Savings cause a reduction in the circular flow.
• Injection: Banks and financial institutions reinject the saved money back into the economy.

Real Flow and Money Flow

• Real Flow: Represents the exchange of goods and services.
• Money Flow: Represents the flow of money.

Stock and Flow

• Stock: The quantity of goods available at a particular time.
• Flow: Measurement of changes occurring over a period.

Important Points

• Circular Flow helps understand how money flows.
• Questions related to the difference between Stock and Flow may be asked in exams.

Conclusion

• If you have any questions, ask them in the comment section.
• See you in the next video.